A Major Move in Venezuela Lands Me Back on Chinese TV

Sometimes my TV appearances happen on very short notice. Like the one yesterday, for example.

Twelve minutes into my routine at LA Fitness, my phone rang. Chinese television wanted to do a segment ASAP.

So I rushed back home for a quick shower, a change of clothes and a limousine ride to the studio in downtown Pittsburgh.

Now, I’ve done these satellite feeds for Chinese national TV many times before. But this one was very unusual.

With a 12-hour time difference, it meant I would be on at 3 AM in Beijing. What, I wondered, was all the rush if I was going to be on in the wee small hours of the morning?

That question was answered as soon I got to the studio…

As it turns out, I was doing an interview they planned to edit and use repeatedly in each news report leading up to the opening of the markets in Shanghai and Hong Kong. Apparently, something had moved me from making commentary in the business section to a bona fide general news story.

That impetus started in Caracas, Venezuela, but what happened will certainly will play out in the U.S. as well. In fact, its effect will change the American refining sector and directly impact the energy sector of the world’s largest oil importer.

But it would also oblige me to walk through a minefield in the interview. More on that in a moment.

Here’s the background…

The Venezuelan-Chinese Connection

Last year, China surpassed the U.S. to become the largest importer of oil from Venezuela, as Chinese energy needs increased and U.S. domestic oil production spiked, requiring less imports. For some time now, Beijing’s has focused its interest on the huge heavy oil reserves in Venezuela.

Years earlier, the former firebrand president, Hugo Chavez, had nationalized the assets of U.S. majors like ExxonMobil Corp. (NYSE: XOM) and ConocoPhillips (NYSE: COP) in the vast Orinoco oil belt. In its place, Chavez had attempted to stitch together a new international alliance to exploit those riches.

It involved China, Russia, and Iraq. A new raw material investment bank was set up in Caracas, and technical support from the three countries was expected to replace the Western majors.

Well, it never worked out as intended.

In the years following the nationalization, production came under pressure as Chavez’s populist (and expensive) social programs at home, combined with market problems abroad, created havoc in the Venezuelan oil sector.

Chinese and Russian support for Orinoco development lacked the essential expertise in heavy oil extraction. Kicking out the “Exxons” of the world threw out the technical ability to exploit Venezuela’s heavy resources. Costs skyrocketed, and Chavez doubled down on the problems with a horrendous budgetary decision.

Petróleos de Venezuela (PDVSA), the Venezuelan national oil company, was suddenly required to redirect portions of its budget to importing needed products – everything from food to household essentials. So an oil giant with significant problems in controlling the rising expense of crude production was now turned into something at which it was even less competent.

Overnight, PDVSA had to become a charity to bail out the failed central government budget and policies.

As a result, the oil company became reliant on loans from Beijing, with the oil flow out of the country increasingly being used to pay pack the debt. In a cycle becoming familiar elsewhere in South America, China came to control the effective usage of another country’s oil profits.

Now Venezuela is also moving in that direction. However, unlike Ecuador, the smallest OPEC producer, Venezuela is one of the largest.

Because of political ineptitude, PDVSA had been put into a no-win situation.

Rising production costs from a macho (but failed) nationalization decision was combined with an increasing drain on revenues from bailing out the government’s failure to feed its own people.

The former destroyed PDVSA in the fields. The latter opened up a leaching of its funds that was impossible to counter without starting a popular uprising.

Citgo Goes on the Sales Block

To redress this, PDVSA needs money and fast. Central to this need is upgrading production, since oil remains the primary source of money in the country.

And that’s why its wholly-owned Houston-based subsidiary, Citgo, has suddenly become huge news, and in the process could fundamentally alter the refining landscape in the U.S.

PDVSA has now put Citgo on the sales block.

Citgo is a major player in the American market. It owns three large refineries in Texas, Louisiana, and Illinois, which together can process 750,000 barrels a day. In addition, the company owns a retail network of some 6,000 branded outlets. Separately, PDVSA, in its own name, has part ownership in two other Texas and Louisiana refineries as well.

(It also has that famous huge sign in Boston’s Kenmore Square, beyond the Green Monster in left field at Fenway, home of my beloved Red Sox.)

Here’s why all of this matters: If PDVSA departs from the U.S. market, it will constitute the biggest single change in the history of American refining. The initial sales price being bounced around is $10 billion for the three main refineries alone, although I believe the price will come in north of that.

And given Venezuela’s acute shortage of capital, it will have to move rather quickly. But it’s not going to have a fire sale here either.

There’s also a potential legal problem. Exxon and ConocoPhillips have been contesting the Venezuelan asset confiscation for almost seven years. They also just happen to be partners in the two refineries PDVSA partially owns in the U.S. that are not part of Citgo. So those are clearly off the table and almost certainly out of any pending sale.

Beyond that the rest of the sale may also be contested by the two American-based companies (and others) still smarting from the political move by Chavez years earlier.

This would seem to prevent this sale from becoming a feeding frenzy among buyers.

On the other hand, Citgo’s processing facilities in Corpus Christi, Texas and Lake Charles, Louisiana are currently processing Venezuelan heavy crude. These are tailor made to refine heavy crude coming down from Canada, now the dominant importing source into the U.S. The third, at Lemont, Illinois, is perfectly situated to take flow from Canada as well.

That guarantees there will be interest in this sale, but the price tag is still very much an open question.

What is not an issue is the time factor. PDVSA management continues to say they’re not in a cash crunch. Yet the reality says something else entirely.

As for the Chinese, there’s once again an opportunity to control oil export revenues from another producing country. The large loans that have already been provided to Caracas are likely to find that additional funds will become available soon.

With a war chest of over $9 trillion in foreign currency reserves, Beijing certainly has some leverage here.

Which brings me back to that minefield I mentioned earlier: Chinese TV is certainly following the Citgo drama closely. But it hardly wants to have me remind them that Chinese policy is at least partly responsible for the decision to sell.

It seems even in media commentary, one needs a certain flair for the diplomatic.

PS. In case you missed it, I delivered an urgent briefing last week on how the chaos in the Middle East is about to “go global.” To get the full report, including what it means for your money, just go here.

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It seems to me that China’s control over increasing parts of Venezuala’s oil production ultimately makes it increasingly likely over time of loosing those assets similar to Exxon and ConocoPhillips Phillips once the value to do so outweighs the costs to Venezuela (sometime in the future).

Dr. Moores, I have to ask you a question that bugs me. How come North Americian oil prices are effected by a war in the Middle East. We in Canada are self sufficient in oil ( what happened to demand and supply )? World Pricing seems to be a convenient way to keep prices high at the whim of the oil companies. The spot market for oil is nothing more than an avenue for oil companies to drive up oil prices at their convenience or anyone else with bags of cash. Governments love this– more tax revenue.I am afraid this greed will have a back lash effect on oil, with alternative energy sources gaining ground. Were am I wrong. Dave

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